Closing empties the temporary accounts so the next period starts at zero. The income summary account is the funnel it runs through.
The sequence is three entries and then a fourth. Debit every revenue account for its balance and credit income summary. Credit every expense account for its balance and debit income summary. At that point income summary holds exactly one number, and that number is net income. It is a credit balance if the period was profitable and a debit balance if it was not. The third entry closes income summary to retained earnings. A fourth closes dividends directly to retained earnings, never through income summary, because a dividend is a distribution and not an expense.
The account could be skipped. Revenue and expense could each be closed straight to retained earnings and the ending balance would be identical. What would be lost is the checkpoint. It is a single place where the period's net income appears as a ledger balance. There it can be tied to the income statement before anything reaches permanent accounts.
It never appears on a financial statement. It is opened and emptied inside the closing process, so its balance at any reporting date is zero.
Put the concept to work
Understand this concept
- Explain why closing runs through a holding account rather than posting every revenue and expense directly to retained earnings.
Apply this concept
- Write the closing entries in sequence through the income summary account, and show that its balance before the final entry equals the period's net income.
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Build on these ideas
- Closing entry — Apply
To apply this concept: Required. The sequence is the closing entries themselves.
- Closing entry — Understand
To understand this concept: Required. The account exists only to serve the closing process.
- Income summary — Understand
To apply this concept: Required. Running the sequence requires knowing what the account collects.
Show 2 more prerequisites
- Retained earnings — Understand
To apply this concept: Required. The last entry in the sequence lands in retained earnings.
- Temporary account — Understand
To understand this concept: Required. It is itself a temporary account and is empty at every reporting date.
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Use this idea next
- Income summary — Apply
Required level here: understand. Required. Running the sequence requires knowing what the account collects.